As global competition increases, companies buy other companies. Owners demand more top-line growth as a way to increase shareholder value. Some owners believe that acquisition transforms their business – it can give competitive advantage through new value preposition and focused business strategy. Yet over two-thirds of all mergers and acquisitions (M&A) fail to produce the projected synergies and financial numbers. Why is that?
On behalf of PwC, Mergermarket and Casa Business School surveyed early this year 600 global senior corporate executives from across industries and geographies. They asked executives about their experiences with value creation through M&A. Here are the highlights of the findings:
Ninety-two percent of acquirers said they had a value creation plan in place for their last deal, but only 61 percent of buyers believed their last acquisition created value. Furthermore, 53 percent underperformed vis-à-vis their industry peers, on average, over the 24 months following completion of their last deal based on Total Shareholder Return (TSR).
From a seller’s perspective, 42 percent of divestors likewise said their last sales generated value, relative to the value that business would have created had it not been sold. Around 13 percent said their last divestment generated significant value, and 35 percent said their last deal actually lost value. Additionally, 57 percent of divestors underperformed vis-à-vis their industry peers, on average, over the 24 months following the completion of their last deal, based on TSR.
Thirty-four percent of acquirers said value creation was a priority on Day One (deal closing) in their last deal but 66 percent of dealmakers say value creation should have been a priority right from the start. Simply put, some acquirers focus on integrating the hard tangible assets (e.g. financial, accounting, and operations systems) to achieve value. But they neglect the soft but equally important intangible assets (e.g. people and culture). Problems might also stem from acquirers’ inability to create synergy, paying too high a premium, selecting inappropriate targets, and ineffective integration processes.
A careful selection of targets and effectively implemented acquisitions can achieve synergy and create value. For example, the difference in sizes between the acquiring company and the target company influences value creation. If the target company is much smaller than the acquiring company, it is unlikely to affect value creation. However, if the target company has capabilities complementary to those held by the acquiring company, an opportunity for synergy creation exists. But as the difference narrows and value creation grows, integration often becomes a problem. It leads to value loss, even if the two companies are of similar size.
While gaining competitive advantage through M&A is a business strategy for growth, continued success depends on how acquirers understand the importance of deal selection, deal management and governance, and post-deal integration. Let’s look at these three considerations that emerged from recent research:
Value creation depends on how the process from merger preparation to post-merger integration is managed. This process includes robust strategy, thorough assessment of whether the deal is worth pursuing, and a clear M&A methodology. Acquirers should include their value creation plan together with their experience in the art of deal-making and cultural issues, which might hamper the realization of value in their long-term strategy.
A successful M&A process uses these best practices: thorough evaluation of the target companies’ strategic interest and of the potential synergies; resource and cultural management; and solid communication strategy that help facilitate change management and achieve ideal balance and raise value creation.
As M&A deals in the Philippines are expected to accelerate in 2019 based on the relatively robust economic outlook, investors are once again challenged to carefully assess how they will manage their acquisitions. It is crucial to develop a strategy that prioritizes value at every stage of the deal, start early, and be thorough in considering every opportunity. They should make sure that deal mechanics add value, key talents remain engaged in integration, and a clear strategy is in place.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.